For A Market Adrift, June 30 May Tell Tale

Rates Action, Shift In Iraq May Offer Direction

Stock prices, which have moved sideways since mid-March, could finally leap up off the couch -- or fall off the stool -- on June 30.

A week from today, the Federal Reserve is set to boost a key interest rate. That's also the day the United States plans to formally cede control to a newly established government in Iraq.

How those two events unfold might give investors strong clues as to what can be expected on the future of inflation, the likely direction of interest rates, the state of U.S. policy in the Middle East and the likely movements in oil prices.

With a clearer outlook, money managers controlling hundreds of billions of dollars would have more reason to invest -- or bail out. Until then, financial analysts see little reason for large movements.

``The market is looking for a catalyst. Many are looking to June 30 to provide that catalyst,'' said Gail Dudack, chief investment strategist at the SunGard Institutional Brokerage in New York.

Already, the markets have reacted in anticipation of what's likely to happen at the end of the month, several analysts said.

The Federal Reserve, with Alan Greenspan as chairman, is expected to raise the federal funds rate from a 46-year-low of 1 percent to 1.25 percent. That modest increase would reverse a downward movement in rates that began in mid-2000. It would also send a signal that the U.S. economy is finally heating up after several false starts in previous quarters. But the Fed could also raise rates by 0.50 percent.

``The earliest rate hikes, when they follow a trend of falling rates, are generally good news,'' said Eric Bjorgen, a research analyst with The Leuthold Group in Minneapolis. Since 1945, when the Fed has jacked up interest rates after a prolonged easing of the money supply, stocks have risen an average of 9.8 percent after the first rate increase; after a second rate increase, stocks have risen an additional 6.45 percent, on average, Bjorgen said.

But a 0.25 percent or 0.50 percent federal funds rate increase on June 30 is, by itself, not likely to send stock prices soaring or slumping in the short run.

Wall Street will look closely at the Fed's stated concerns about inflation and whether interest rates are likely to move up sharply in the near future.

Since the end of World War II, rising inflation and interest rates have killed many a bull market rally, analysts are quick to note. The Consumer Price Index rose at an annual rate of 3.1 percent as of May 31, according to the U.S. Bureau of Labor Statistics, up from an annualized rate of 1.7 percent in late February.

``If inflation is rising, is it part of a sustainable trend? Or is it a result of short-term pressure from rising commodities prices? And with rises in commodities prices moderating or heading in reverse, will inflationary pressures subside, as well? These are key questions,'' and investors will be seeking answers to these questions, said Ann Sonders, chief investment strategist with Charles Schwab & Co.

The second huge issue -- or ``overhang'' as it is called on Wall Street -- is what will happen in Iraq as the United States turns over sovereignty next week to the interim government. Will the country stabilize, or will there be civil war or major acts of sabotage to oil pipelines? Both would likely affect the price of oil, which, in turn, could drive up inflation.

So-called ``political risk'' has already added $5 to $9 a barrel to the spot price of crude oil.

If our policies fail in Iraq, $50- or $60-a-barrel oil would not be out of the question. On the flip side, if there is a peaceful transition, the price of oil could go back into the $20-a-barrel range, which would nip some of the worries about inflation.